1. If inflation expectations increase, what would you expect to happen to the re
ID: 2789806 • Letter: 1
Question
1. If inflation expectations increase, what would you expect to happen to the retums required by investors in bonds? What would happen to bond prices? Explain your answer 2. Explain the difference between unsystematic and systematic risk, and give some examples of each type. Why can educated investors comfortably ignore unsystematic risks when constructing a portfolio?. 3. What does beta measure, and how does the CAPM model use this information to help us value securities? A biotech company is an extremely risky investment, since the results of a single clinicaltrial can sometimes cause the company to be very valuable or essentially worthless. Given this information, under CAPM would you expect a biotech company to have a low beta or a high beta? Explain.Explanation / Answer
Example of Systematic risk- the most common example of systematic risk is the period of recession which impacts the economy as a whole.
Example of Unsystematic risk- An appalling manager not able to manage the stock of the firm.
The well educated investors wisely choose the stock with the better returns and different types of risks are considered. The unsystematic risk is automatically reduced when the portfolio is diversified.
3. Beta measures the volatility of the stock against the overall market.
In CAPM Model, beta is used to calculate the expected return of the asset against the expected market returns.
Most of the biotech companies have a high beta. When CAPM is used, it has shown that mostly biotech companies have beta of more than one. A beta of greater than one shows that the security is more volatile.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.